- BlueMountain owns HLSS debt. It argues that the debt should get a 3% interest rate increase because there has been Events of Default under the terms of the debt. Here is their press release. Currently it has sent a letter to the trustee. Presumably a lawsuit may follow unless the trustee address their claims.
- RMBS investors are unhappy with Ocwen and the RMBS trustees because they don’t think Ocwen is doing a good job as the servicer. (Press release.)
I honestly do not have a strong legal understanding of the issues. Do not take what I say too seriously.
I think that the trustee will initially ignore BlueMountain’s request for an Event of Default. If the trustee agrees, it will almost certainly be sued by HLSS because HLSS won’t want to pay the extra interest. If the trustee does not agree, it will be sued by BlueMountain. However, there is a chance that BlueMountain does not go ahead with a lawsuit because it may not want to pay for it. So I think the trustee will wait for a lawsuit from BlueMountain.
The evidence cited in the BlueMountain press release seems to be mostly old news. If they thought that they had a reasonably strong case, I don’t know why they waited so long. I have no idea when they initially purchased the HLSS debt or put on their Ocwen short position.
Keefe Bruyette & Woods Inc. analysts led by Bose George wrote in a report Friday that “there are likely to be strong legal defenses to the argument being put forward by BlueMountain.”
Because I am not a lawyer, I do not know if there is merit to the case.
Gibbs & Bruns suing Ocwen and RMBS trustees
There are naturally conflicts of interest between the mortgage servicer and mortgage investors. For a non-agency RMBS, the Pooling and Servicing Agreement (PSA) for that particular pool will lay out the servicer’s obligations and legal protections given to the RMBS investors. The terms of the PSAs often differ. Gibbs & Bruns is going after 119 RMBS trusts. The story may be different for some of these trusts. I do not see myself reading 119 PSAs so do not expect any detailed analysis from me.
The accusations in the Gibbs & Bruns press release seem very general and non-specific:
- Use of Trust funds to “pay” Ocwen’s required “borrower relief” obligations under a regulatory settlement, through implementation of modifications on Trust- owned mortgages that have shifted the costs of the settlement to the Trusts and enriched Ocwen unjustly;
- Employing conflicted servicing practices that enriched Ocwen’s corporate affiliates, including Altisource and Home Loan Servicing Solutions, to the detriment of the Trusts, investors, and borrowers;
- Engaging in imprudent and wholly improper loan modification, advancing, and advance recovery practices;
- Failure to maintain adequate records, communicate effectively with borrowers, or comply with applicable laws, including consumer protection and foreclosure laws; and,
- Failure to account for and remit accurately to the Trusts cash flows from, and amounts realized on, Trust-owned mortgages.
There might be some substance to the claim that Ocwen has given out too many loan modifications. There servicer is highly incentivized to given out loan modifications. If a loan goes into foreclosure, Ocwen loses its servicing fees on that loan and has to pay for the financing of servicing advances. Where the PSA allows for loan modifications (some don’t and the terms vary greatly), a loan modification will allow Ocwen to hang onto future servicing fees and to quickly have its advances repaid.
Contractually/legally, I believe the test is whether or not a loan modification is NPV positive for the mortgage investors. I believe that there are many ways to manipulate the NPV calculation to justify a loan modification. There is probably some legal grey area where a servicer might expose itself to legal problems from being overly aggressive in giving out loan modifications.
Conflicted servicing practices
My theory is that Ocwen sold its kickbacks on force-placed insurance to Altisource for a lump-sum fee (see my post “Kickbacks on force-placed insurance revisited“). If these lawyers are smart, they might figure out a way to go after Ocwen for doing this.
Altisource exited the force-placed insurance “brokerage” business partly due to concerns about litigation risk. The Altisource press release states:
[…] given the uncertainties with industry-wide litigation and the regulatory environment, Altisource believes it is in the best interest of the Company and its shareholders to discontinue this line of business […]
Kickbacks on force-placed insurance mainly harms mortgage investors and also harms borrowers/consumers. Presumably, any kickbacks would expose a company to lawsuits from consumers and mortgage investors. In the past, I believe only consumers have won settlements over these issues.
I do not know what the legal situation with the 119 PSAs is. Some of the PSAs may require the servicer to purchase force-placed insurance (or hazard insurance) at “commercially reasonable” rates. Ocwen might pass that test (the CFPB consent order already requires Ocwen to pay commercially reasonable prices). Ultimately, I have no idea what the language is for the 119 PSAs.
Failure to maintain adequate records, Failure to account for and remit accurately to the Trusts
I have no idea about this stuff.
Servicers often do not act in the mortgage investors’ best interests
Generally speaking, PSAs are poorly structured and do not fully align the servicer’s interests with the investors’ interests.
- Servicers try to spend as little money as possible repairing REOs. They also try to sell them quickly.
- Servicers may cut corners on staffing levels, affecting the ability of the servicer to help arrange loan modifications and to provide sensible underwriting.
- Because the servicing fee is based on UPB, servicers are incentivized to be overly aggressive in granting loan modifications.
- Because the servicing fee is based on UPB, servicers may turn down sensible short sales. They may also make things incredibly difficult for the borrowers and realtors trying to put a short sale together.
- The PSA may prevent the servicer from doing sensible things like loan modifications. (It depends on the PSA.)
Unfortunately, mortgage investors often cannot do anything about this. They entered into a legally-binding contract.
Extrapolating from the past: Nationstar
In the past, Nationstar tried to abuse mortgage investors by selling non-performing loans on auction.com.
The reason why Nationstar wanted to sell NPLs are two-fold:
Nationstar has an ownership stake in auction.com. It makes money from auction.com. This is an obvious conflict of interest.
- Nationstar wants its servicing advances to be repaid quickly. The faster it gets rid of the problematic loans, the faster its advances are repaid.
Investors sued. Nationstar cancelled the deal and did not go ahead with the sale of NPLs on auction.com.
Suing the servicer is one way that mortgage investors can get better behaviour from their servicer. This may work better in situations where the servicer’s behaviour looks more egregious.
For more information try this news article: Nationstar, KIRP Agree to Settle Lawsuit Over Loan Auction.
The bottom line
I’m not a lawyer. Please don’t take this post too seriously. I don’t think that these events are a big deal for Ocwen/HLSS/Altisource but I could be completely wrong (e.g. I grossly underestimated the impact of what Benjamin Lawsky would do to Ocwen and Altisource).